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NATIONAL

INDUSTRIAL

C ONF ERENCE B O A R D

*47 PARK AVENUE, NEW YORK 17, N. Y.
Telephone: PLaza 9-0900

Special
Release

FOUNDED 1916

Information
for the Press

THE SURRENDER TO INFLATION

Address by the Honorable Marriner S. Eccles,
Member, Board of Governors, Federal Reserve System,
before the 298th Regular Meeting of the National Industrial Conference Board
delivered on the evening of September 23, 19U8, in the Grand Ball Room,
The Waldorf-Astoria Hotel, New York

Mr. Chairman, Honored Guests, Ladies and Gentlemen: This organization has
been good enough to invite me to appear before them four times prior to this occasion.
I must have either created enough controversy or given enough satisfaction to some
of ray listeners, or I wouldn't have been invited the second time and certainly not
invited back upon this fifth occasion!

VSy situation — and I have told this story a good many times in appearing
before other groups ~ is not like the situation one evening when I was talking, off
the record, to a group of McGraw-Hill Publishing Company editors* My assistant at
that time was sitting next to me, when I asked him if I had not appeared before that
group before. He very seriously said to me he was very sure that I had not or I
would not have been there that evening. So I am very glad that I have a better repu­
tation with you people than with those who know me best.
I regret that I cannot believe the problem of controlling inflation can be
made as mechanistic and as single as ray good friend, Dr. Spahr, seems to think it
can. I should like to remind you that curing the 20*s, and I think up until the time
of the Bank Holiday, the situation was a good deal like the situation to which Dr.
Spahr refers. We did have a redeemable currency, that is, redeemable in terms of
gold. We lost a good deal of gold because of that redemption privilege, but it didn't
stop the deflation. Neither did it give to the debtors, certainly, a dollar of un­
changing value. The man who had to pay his debts in 1932 found out the dollar at
that tin® had grown in its purchasing power, just as the creditor today has found out
the dollar has been contracted in its purchasing power.
Redeemable currency has not given to this country, or any country, a medium
of purchasing power of unchanging value. I don't want to take up the time I have to
debate this question. I think it is, for all practical purposes, academic. There
will be nothing done about accepting Dr. Spahr's program.
Hie rest of the world, of course, would like the price of gold to be in­



Address by Marriner.S. EccXes

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creased in order to get more for the gold they send us.
This is the primary market in the world for gold. The rest of the world
wants American goods. To the extent that they cannot get the credits or grants to
make up the deficiency of their balance of payment situation, they are, of course,
willing to part with their gold.
Inflation is a very unfortunate situation for any country to have to con­
tend with, because of the great injustice it does to a great many people, particu­
larly the creditor, and the people who put their savings into obligations which are
payable in a specified amount of dollars, in what we call debt forms, that is, people
who buy insurance, who have annuities, and so forth.
However, deflation, as I think we will all remember if we will look back to
the period of '31, '32, *33 and '3U> is likewise a very unpleasant situation. What
we really want is a degree of economic stability that will bring about fairness to all
of the various income groups,
Speaking of the problem we have to contend with at the present time, which
is the problem of inflation — I think inflation now means deflation later, unfortu­
nately — we should recognize what inflation is and why we happen to be in our present
particular predicament. I would like to speak a few moments on the causes, that is,
what inflation is and what its causes are — you know, I think, pretty largely its
effects — and how we might deal with it.
Inflation is a condition in which the means of payment in the hands of
people — by ’»people,” I mean all elements of the population — exceeds the available
supply of goods and services. You may have an available supply of purchasing power
in excess of the supply of goods and services, but it may not be spentj it may not be
put into velocity. So you have two factors to consider in connection with your money
system. You must first consider its volume and then its velocity, the use to which
it is put.
When we started our defense program and we later got into the war, we found
that we had such a backlog of labor, goods of all kinds, capacity, that for some
little time inflation was no problem. As a matter of fact, in 19U0-U1 a little in­
flation was healthy, because we hadn't recovered fully from the deflation and we
still had a great many unemployed people. However, the war proceeded and we soon
found that nearly half of our resources were devoted to the prosecution of the war.
The government was not able to pay for any such cost out of its current
income. In spite of the heavy wartime taxes and in spite of the great savings drives
which were made to bring back into the Treasury some of the income created by public
expenditures, there was a very large residual amount of expenditure which had to be
financed. The only place the government could turn was to the banking system. That
is where the expansion of the money supply came from.
I agree, Mr. Prentis, that our military is not an economical establishment.
We possibly could have spent a good deal less. However, I don't know how we could
have paid for the war, without large borrowing from the banking system, unless the
tax burden had been far greater, or unless the public would have been willing to save
far more.
We ended the war with a huge backlog of demand. After five years, we all
know there was a great shortage in consumer durable goods as well as in capital goods.
We ended the war with a supply of money which had increased through bank financing
by about three times. That, mind you, is entirely aside from the volume of



Address by Marriner S. Eccles

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government securities which were the equivalent of cash held by the public.
It was quite evident then that this backlog demand could not be net immedi­
ately. There was, first of all, the normal current demand. To that was added the
accumulated backlog demand, supported by a volume of purchasing power which was
widely spread and held in the hands of individuals as well as businesses. With all
controls taken off inflation was inevitable. The miracle is that we didn't have more
inflation than we have had, because it was imoossible to cure the causes of inflation
by increased production overnight, as it were, and it was impossible to contract sud­
denly or rapidly the large supply of money that had been created.
We made the very great error of removing all wartime controls too soon. In
that connection, I want to quote from a statement I made before this body four years
ago)
"Nobody can foretell" — that is in the fall of 19UU — "how strong in­
flationary pressures will be during the transition from war to peace. Inflation
pressures include the pent-up demand for consumers durable goods and housing} con­
tinued shortage of certain foods and clothing items; the huge volume of liquid assets
in the hands of the public} a potentially large foreign demand} and, finally, the
people's desire to return to normal and to get rid of wartime controls once victory
is won. The longer the war lasts, the greater the danger of inflation will be because
of the cumulative increase in pent-up demand for civilian goods*' — and I might have
added capital goods -- "and in liquid assets in the hands of the public.
"Because of the uncertainties of a transition period, price, rationing and
fiscal controls should be kept intact until industry has resumed civilian production
on a large enough scale adequate to meet the demand. Only thereby can the consumer
be assured that he will not lose by postponing purchases and that the purchasing
value of his savings will be protected. This is vital because of the huge volume of
liquid savings accumulated in the hands of the public as a result of war financing.
The millions of people who own these savings and these shares in the national debt
should be encouraged to retain them. If spent when there are shortages of goods, the
effect would, of course, be highly inflationary. Even after the transition to peace­
time production, however, it would be far better if consumption were sustained out
of current income rather than by drawing upon savings. Moreover, it is better to
have our national debt widely owned by the great mass of our people than concentrated
in the hands of relatively few."
We didn't get very much inflation during the war. It was possibly less
than in most any other country. The reason for that was the complete harness and
controls which were put into effect, including allocations, building permits, price
control, rationing, export licenses, wage controls, and excess profit taxes. They
all fit together in a necessary harness of control. When part of them was taken off,
it finally became necessary to take them all off.
Price control was inadequate and ineffective after allocations, rationing,
wage controls, excess profit taxes and other component controls were removed.
All that was done very promptly after the war ended. It was done upon the
demands of the Administration then in power. They responded to the public pressures.
The minority in Congress did not raise any opposition or objection.
What has happened to that supply of money? In the first place, the supply
of goods and services has not yet caught up to it, because it has been expanded
further, I would say that a great deal of it has been activated, whereas during the
war it was not in active use. It was lying idle in banks. The owners of those funds
were not spending them. The expansion in our production has possibly gone up on an



Address by Marriner S. Eccles

The Conference Board

average of from a third to 100 per cent. Taking production as a whole, I would say
it has increased as much as three-quarters. You can see it has not yet approached
the supply of money.
luring the period since the war and up until June 30th of this year, the
government was able to reverse in part the inflationary process of deficit financing
by the. application of the budgetary surplus to the liquidation of the public debt
held by the banking system. That has equalled more than lU billion dollars. Aside
from that, there was a very substantial reduction in the total volume of deposits
out of the very large Treasury balances which were held in the banks as a result of
the 8th War Loan Drive, At the beginning of 191*6, the government had around 25 bil­
lion dollars of balances.
Those were deposits that were not activated. They were deposits that were
entirely unnecessary, as the 8th War Loan was unnecessary. Therefore, the government
in 191*6 used those balances to pay on its public debt, and thus very substantially
reduced the public debt out of those balances, which never got into the spending
stream.
Aside from that, in the last fiscal year, the one ending June 30th, and the
fiscal year before, there were substantial budgetary surpluses. The government,
through those surpluses, was contracting the supply of money by paying off bank-held
debt, thus reversing the process by which the supply of money was expanded during
the war. That has been helpful.
However, the banks practically nullified the effect of that contraction —
and I mean the commercial banks — because they have loaned an amount of money about
equal to the amount that was contracted by the budgetary surplus. That has been un­
fortunate, It is unfortunate that bank credit has expanded, because the deflationary
effects of the budgetary surplus has been, as I said, offset by the bank credit ex­
pansion. Accordingly, there is no decline in the total supply of money except the
decline that took place when the government applied the large unused balances it had
after the war to payment on the public debt.
At the present time we are in this situation* The budgetary surplus has
disappeared because of tax reductions, and expansion both in the foreign aid program,
and also in military expenditures. The top of an inflation is the wrong time to have
the budget either unbalanced or just in balance. There should be a budgetary surplus
to use as an anti-inflationary weapon. It is the most effective single weapon there
is.
Speaking of the monetary situation, the Federal Reserve has been criticized
for not increasing long-term interest rates, and thus curbing the increase in the
supply of money. We must remember that with a public debt of 2fj0 billion — sixty
per cent of the entire debt; all other debts are about 1*0 per cent — it is quite a
problem to manage the public debt, especially when you consider that 50 billion of it
falls due within the next twelve months, another 50 billion within the next five
years, and 58 billion is composed of E, F, and G securities, demand obligations.
When you start down the road of increasing the long-term rate, you must be
willing, it seems to me, to go all the way necessary to accomplish the purpose of in­
creasing savings, because they are deficient in relation to investment demand. You
must use the high rate to decrease investment demand, so that you will get less pres­
sure upon the capital goods market, and you will get more money in savings from the
people.
The question is? How far do you have to go to bring that about? Should you
go to a 1* per cent rate to induce savings, or to discourage new investment? That



Address by Marriner S. Eccles

The Conference Board

would mean that the long-term 2-1/2 bonds would drop to about 72, and all other long­
term fixed obligations would drop in proportion. The refunding of the public debt
would have to be done, of course, at such a rate as would assure its successful re­
funding. Certainly, there would not be an immediate adequate supply of savings to
take care of 50 billion refunding. The refunding would have to be done at a higher
rate than that being paid to present holders. The short-term debt would have to be
financed largely by the banks and corporations.
That is a road I would hesitate very much to start down. You can be very
sure that, by adopting what is known as the traditional central banking control, you
could stop the expansion of the means of payment. There is no question about it.
You could deny the banks Federal Reserve funds, which is the basis for their credit
expansion.
We are confronted with a dilemma today. So long as you support the govern­
ment bond market, you find it impossible to control either the banks or the insurance
companies, or anyone else who wants to sell bonds. The Federal Reserve is the
ultimate market, and by its purchase of securities it creates deposits and reserves
in the banking system.
The insurance companies are castigating the banks, and the banks the in­
surance companies. Certainly, the insurance companies should not be selling their
long-term government securities at this time. Those securities were purchased out
of the savings of the American public which were put into insurance during the war,
and it was spent by the government for war purposes when those bonds were bought, and
the government is not in a position to collect enough taxes to pay off those bonds.
So when the insurance companies sell their bonds on balance, they are
spending again the money that has already been spent in the prosecution of the war.
The expenditure that is made by the insurance companies when they sell their bonds
is not out of current savingsj it is in addition to current savings. It is infla­
tionary* That is likewise true of anyone else who sells bonds under these conditions.
Unless there is sufficient demand on the part of buyers to offset the sale
by sellers, the residual amount goes into the Federal Reserve System. Up to date,
it has not been serious.
When these bonds are sold and the Federal Reserve buys them, the banking
system gets deposits on the one side of the ledger and excess reserves on the other
side of the ledger. The banks are able thereby to expand credit six times. I won't
explain that; accept my word for it. The Reserve System did not want additional
powers to control bank credit expansion. All we wanted was a partial substitution
for the powers we were unable to use, the traditional powers, unless we withdrew
from the support of the government market and let that market find its own level,
with all the dire consequences, and particularly is that true today when the foreign
situation is what it is.
Do we want the American public to lose confidence in government securities?
What would a decline of 10, 15, or 20 points in government securities held in your
financial institutions mean? What would it mean in your ability to finance another
deficit if we should be confronted again with that problem?
All that the Federal Reserve sought was a partial substitution for the
traditional powers which we could not use because 6f the size of the public debt, and
because of the exigencies of the situation with which we were confronted. The
traditional powers were designed in 1913 to deal with a condition which existed then,
but certainly does not exist in the world of today.



Address by Marriner S. Eccles

The Conference Board

Did we get them? We did not. Most of the bankers were anxious to have us
give them a ready market for their securities without depreciation, but they were
as unwilling to have us control the further expansion of the means of payment as
labor was to have the government exercise control over wages. Everyone wanted to
have complete freedom in a world in which you cannot have complete freedom, in a
world which requires, in your own interest, in your own protection, certain re«»'
straints.
It seems to me we are in a dilemma. There are a lot of soft spots devel­
oping in the economy. Prices and wages have reached the point where they have
created disequilibrium. Many people have been priced out of the market. They are
spending their savings and they are using credit, and that is tending to sustain
the inflation.
We are getting caught up in many fields. The large agricultural crops,
the increase in production in many directions, have tended to catch up with the in­
flationary pressures. It is unfortunate that the inflation has gone so far j and the
farther it goes the more difficult the adjustment, and the less cushion vie will have
under it. Many of the things we have been doing were things that should have been
designed for a deflationary period.
Some of the public expenditures, by city, county and state, should have
been reserved for a cushion under a deflationary period. Some of the easy bank
credits should have been reserved for a later period, particularly easy housing
credit. Likewise, the tax reductions should have been reserved for a period of de­
flation, Had it been possible to hold down the foreign aid, that would have been
something desirable for a period of deflation; and, of course, that is true of mili­
tary expenditures.
Unfortunately, in the past two years we have been trying to catch up on
housing, on capital expansion, on consumer durable goods, right at the same time
when we have had a huge foreign aid program, and now an expanding military program.
The longer it goes, the less cushion you will have under your deflationary process.
It is too bad so much has been done at the high inflationary prices as a basis of
credit.
It is desirable that the inflation be stopped. It is desirable that
further bank credit be curbed. It is desirable that the insurance companies and
other holders of governments retain them. It is desirable that all public expendi­
tures, city, county and state, be contracted so far as it is possible to do so. It
is likewise desirable that we do not give encouragement to easy mortgage credit for
housing at these prices and get little people in debt. It is desirable that farm
support prices be reduced. It is desirable that production to the fullest extent
possible be maintained.
You get at the causes of "the inflation by more production in the fields
where there are shortages, and by contracting the supply of purchasing power, first
through budgetary surpluses, and then through either a contraction of credit or, at
least, an attempt to prevent a further expansion of credit.
Unless inflation is sustained and intensified through expanding military
expenditures, or further expanding foreign aid — certainly, if we can establish a
basis of peace, and that is essential — then, without question, we will be facing
the dilemma of deflation. Because the inflation has gone as far as it has, it will
give us considerable trouble — it will give us less trouble the sooner readjustment
comes, by reason of the fact that there would still be some backlog demands, and a
considerable cushion that can be used to temper the deflation.



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